Accounting Scandal Upends Toshiba’s Lauded Reputation; 2 bosses’ rivalry helped fuel Toshiba’s bad accounting; Toshiba may face shareholder lawsuits

Accounting Scandal Upends Toshiba’s Lauded Reputation
22 July 2015

TOKYO — Few companies in Japan convey respectability like Toshiba, the sprawling industrial conglomerate that, to the surprise of many here, has found itself at the center of one of the country’s largest accounting scandals.

Toshiba’s chief executives have for decades sat at the apex of Japan’s establishment — civic leaders as much as business managers, in many people’s eyes. One boss from the 1990s went on to run the Tokyo Stock Exchange, then the national postal system. The company features on a prominent index of businesses thought to combine profitability with clean, modern corporate governance.On Tuesday, in defiance of that image, the chief executive and two of his predecessors resigned their positions at the company, along with several lesser executives, over accusations that they drove the company to overstate its earnings by $1.2 billion over the past seven years. The figure is equal to about a third of the pretax profits that Toshiba reported during that period.

Toshiba has a 140-year history and was like a straight-A student when it came to corporate governance,” said Shin Ushijima, a lawyer who serves as president of the Corporate Governance Network, a watchdog group. “Toshiba shares are in everyone’s pension plans. Executives’ responsibility is extremely heavy.”

At a news conference at Toshiba’s headquarters attended by several hundred journalists and financial analysts, Hisao Tanaka, the current chief executive, bowed deeply in a show of remorse. “I apologize from my heart to all our stakeholders,” he said. He acknowledged that the company had engaged in “inappropriate accounting” but said it had not done so intentionally, and that he had not told subordinates to exaggerate the profitability of their divisions.

The resignations removed half of Toshiba’s 16-member board of directors. Along with Mr. Tanaka, Norio Sasaki, Mr. Tanaka’s immediate predecessor as chief executive, who is now Toshiba’s vice chairman, is also stepping down, the company said. So is Mr. Sasaki’s predecessor, Atsutoshi Nishida, who will relinquish his nonexecutive position as senior adviser. Toshiba’s chairman, Masashi Muromachi, will take over as president and chief executive until a new leader is appointed in September, Toshiba said.

Doubts about Toshiba’s financial reporting have grown since April, when the company, prompted by an investigation by financial regulators, said it was examining possible accounting inaccuracies in one of its divisions. An internal investigation initially found several tens of millions of dollars’ worth of bookkeeping discrepancies — and the amount quickly ballooned.

On Monday, a committee of independent experts hired by Toshiba said it had found an additional 151 billion yen, or $1.2 billion, of overstated earnings, with problems in virtually all corners of its business, which encompasses products stretching from refrigerators to nuclear power plants.

Senior executives were singled out for blame: The committee said it had discovered “systematic involvement, including by top management, with the goal of intentionally inflating the appearance of net profits.” Toshiba financial officials, it said, had “deliberately provided insufficient explanations to auditors, with the intention of carrying out a systematic cover-up.”

Toshiba’s share price had tumbled more than 25 percent since the admission in April. It rose more than 6 percent on Tuesday, as the resignations appeared to draw a line under the crisis.

Japan has experienced plenty of accounting scandals, but only a handful have been larger, mostly involving financial institutions at the height of the country’s banking crisis in the 1990s.

The Toshiba scandal has raised questions about efforts by the Japanese government to improve standards of corporate governance, mostly with a new set of guidelines for managers and institutional investors introduced last year. Superficially, at least, Toshiba met or surpassed most of its provisions, which cover things like the number of independent directors companies are expected to employ. Yet that did not prevent its apparent reporting discrepancies.

Toshiba satisfied the formalities of the code, but not the quality,” said Toshiaki Oguchi, a governance expert who helped advise the government in formulating the guidelines. He noted that two of Toshiba’s four outside directors — twice the number the code recommends — are former diplomats, with little to no experience overseeing commercial enterprises. “It’s not about quantity,” he said.

Toshiba said it was only beginning to look at ways to reshape the company to prevent a recurrence, but in an initial step the company said it would put one of its other independent directors, Hiroyuki Itami, the former head of the commerce department at Hitotstubashi University, in charge of its audit committee. Critics, including the investigating panel, have pointed to the fact that the committee had been headed by longtime Toshiba insiders as potentially contributing to the accounting problems.

Mr. Oguchi said the drive to improve corporate governance had been focused less on preventing malfeasance than on increasing profitability. Japanese companies, especially big and established ones like Toshiba, have long been seen to tolerate low profits in the name of social harmony, by putting off painful decisions such as closing down or selling money-losing divisions. The code, Mr. Oguchi said, was intended in part to change that tendency, by making managers more accountable to investors.

The stock index that touted Toshiba’s supposed strengths — the JPX Nikkei 400 — was introduced last year, emphasizing what it said was mutually support between strict oversight of management and high investor returns.

Toshiba’s executives may have felt pressed, but failed, to better satisfy shareholders.

The company’s problems, the investigative panel found, date to the economic slump set off by the global financial crisis in 2008. Even as demand for Toshiba’s products fell, top executives insisted that managers meet increasingly difficult profit goals, according to its report. Under pressure, many resorted to accounting gimmicks and shortcuts, the committee said.

The committee accused Toshiba of breeding “a corporate culture where it is impossible to go against one’s bosses’ wishes.”

Mr. Muromachi, the chairman, said at the news conference that Toshiba “may have gotten carried away with its focus on the quarter at hand.”

* Toshiba Inflated Earnings by $1.2 Billion, a Panel of Experts Says

http://asia.nikkei.com/Business/Companies/2-bosses-rivalry-helped-fuel-Toshiba-s-bad-accounting

http://asia.nikkei.com/Business/Companies/Toshiba-may-face-shareholder-lawsuits

http://asia.nikkei.com/Business/Companies/Toshiba-intentionally-deceived-panel-says-execs-seen-resigning

July 21, 2015 3:40 am JST

Office politics writ large

2 bosses’ rivalry helped fuel Toshiba’s bad accounting

TOKYO — Frictions between a former president and his predecessor played a part in encouraging accounting irregularities at Toshiba.

When Vice Chairman Norio Sasaki was president from 2009 to 2013, then-Chairman Atsutoshi Nishida was adamant about meeting budget targets. To thwart Nishida’s influence, Sasaki apparently ended up instructing subordinates to cook the books.

This came after Toshiba had switched to a new governance system, allowed under a 2003 legal change, that vested oversight authority in the chairman and executive authority in the president to achieve separation of powers. The stock market welcomed the shift as a sign of an eagerness to strengthen corporate governance. But in the end, the step seems to have been largely cosmetic.

When current President Hisao Tanaka took the helm in 2013 with Nishida’s backing, he ended up following in his predecessor’s footsteps instead of addressing the inappropriate practices. This, too, was motivated by a spirit of rivalry: Tanaka did not want earnings to fall below those of the Sasaki era. Nishida is now an adviser.

Toshiba seeks to rejuvenate its leadership team with younger blood to uproot its top-down culture, a fundamental cause of the inappropriate accounting. Tanaka and Sasaki are expected to announce their resignations in a news conference Tuesday. More than half of the board’s 16 members will likely step down at a special shareholders’ meeting in September.

Corporate governance will also get an overhaul. The company will set up as early as this month an expert committee of accountants and lawyers to offer advice on the board’s roles, the selection of directors, and decision-making mechanisms.

 

July 20, 2015 10:23 pm JST

Scandal fallout

Toshiba may face shareholder lawsuits

TOKYO — In addition to paying a potentially hefty fine to regulators for improper accounting, Toshiba may also have to face angry shareholders, who could opt to file lawsuits against the company and responsible managers.

With the third-party panel set up by Toshiba having reported its findings, Japan’s Securities and Exchange Surveillance Commission will pursue its own investigation and, depending on the outcome, may urge the Financial Services Agency to levy a monetary penalty.

The commission could file a criminal complaint against Toshiba to prompt prosecutors to bring charges. But that is usually reserved for more nefarious cases of accounting embellishment, as was the case with Olympus. So Toshiba is likely to be spared criminal charges.

But the company may face a fine exceeding the record 1.6 billion yen ($12.7 million) that IHI forked over in 2008 for accounting irregularities. Toshiba issued 460 billion yen in bonds in the five years through fiscal 2013, to individuals and other investors — a factor that could lift the amount of financial penalties.

Based on the commission’s decision, the FSA’s Certified Public Accountants and Auditing Oversight Board will also probe Ernst & Young ShinNihon, the auditing company that signed off on Toshiba’s earnings. The Tokyo Stock Exchange is expected to place Toshiba on a watch list as a company with weak internal controls after Toshiba releases its earnings report, expected by the end of August.

In lawsuits from shareholders, investors could seek damages for the drop in the stock price, which has tumbled 26% since April 3, when the company first disclosed the accounting issues. Attorneys could organize a large number of shareholders to bring the matter to court.

A class-action suit in the U.S. is a possibility given that American depositary receipts had been issued for the Japanese company, says Ken Kiyohara, an attorney versed in U.S. securities litigation.

Toshiba as a company could also sue management, demanding compensation for the 1 billion yen or so cost of setting up the third-party investigative committee, and for the expected financial penalties. If the company does not take action against responsible managers, shareholders could.

 

July 21, 2015 2:04 am JSTcounting scandal

Toshiba intentionally deceived, panel says; execs seen resigning

TOKYO — Top members of Toshiba‘s management took part in an organized effort to delay booking business losses, an investigative panel wrote in a scathing report Monday.

Management made a “business decision” to practice deceptive accounting, with three successive presidents pressuring business divisions to perform, according to a summary of the panel’s findings.

President Hisao Tanaka and other senior executives are expected to announce their resignation at a news conference Tuesday evening, after the company publishes the full report. The management shake-up is likely to remove the two ex-presidents named in the report, Vice Chairman Norio Sasaki and Atsutoshi Nishida, now an adviser to the board of directors. Chairman Masashi Muromachi, who will lead efforts to craft safeguards against a recurrence, may take on the role of president as well.

Inflated profits

The Japanese electronics and electrical equipment group’s manipulated profits add up to 156.2 billion yen ($1.25 billion) from fiscal 2008 through December 2014. The independent panel, led by a former Tokyo district chief prosecutor, identified 151.8 billion yen of this amount while Toshiba found the remaining 4.4 billion yen through its own review. The total accounts for nearly 30% of the company’s stated pretax earnings for the period in question.

Toshiba used the percentage-of-completion method of accounting, normally intended for long-term projects, to postpone booking losses. The company consistently engaged in such misreporting in line with management’s aim of “inflating profits,” the panel concluded.

Seeking causes for this lapse, the panel found such instances as top management imposing unrealistic profit goals, called “challenges,” on the personal computer division. To achieve these targets, the company-like business division was forced to cook the books — by bringing forward future earnings, for example — the report contends. “A corporate culture where it is impossible to go against one’s superiors” proved a contributing factor. Toshiba gave inaccurate explanations to auditors and used tricks to conceal its fraudulent accounting, the report alleges.

The panel also faults Toshiba’s internal controls — not only its risk management team, but also its board of directors and audit board failures in oversight. It calls on the company to rebuild its hollow governance, take steps to prevent reoccurrences of accounting fraud, such as abolishing “challenges,” and discipline senior managers after determining their involvement in the wrongdoing.

Fines possible

Toshiba, which competes with the likes of General Electric, will finalize its results for the year ended March 31 and restate past earnings. It may book 70 billion yen in write-downs, primarily for fiscal 2012, reflecting the noninflated profitability of certain businesses including semiconductors and PCs.

Japan’s Securities and Exchange Surveillance Commission and Financial Services Agency are weighing fines against Toshiba for improper accounting. The Tokyo Stock Exchange is expected to designate the company as “on alert,” a label warning investors of problems with internal controls.

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